May 2, 2012
Sell in May and go away? You would have to be hiding under a rock to avoid the chorus of opinions on this investment mantra. And the idea is appealing – after a robust first quarter followed by a bumpy April, why not lighten up on your stock market holdings, take your profits and spend the next few months at the beach, on the golf course or fly-fishing in Montana?
Even the evidence seems to support the theory that this might be a good strategy. John Kozey, an analyst with the StarMine research team at Thomson Reuters, took a look at how stocks have performed in the May through October period, between November and April, and for the entire year, measured from November through to the end of October. And yes, the November through April period generated the greatest average annual return for investors since 2000 (the period that Kozey believes is most relevant for today’s investors), while owning stocks between May and the end of October lost an average of 1.9 percent.
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So, why not just sell? Well, there’s nothing pre-ordained about seasonality. Just ask all those investors who chuckled to themselves every year at the beginning of December as they added to their holdings while awaiting the “Santa Claus rally,” another one of those seasonal phenomena. The problem was that once a certain critical mass of investors figured out that this was occurring, the incentive was in place for them to get in ahead of those buyers. The Santa Claus rally became a Thanksgiving rally and looked set to become a Halloween rally before it dropped from he headlines.
If investors start behaving as if “sell in May” is a valid strategy – that something about months that don’t have the letter “R” in them is toxic to stock market returns – then arbitrageurs inevitably will move in and trade away that difference. Odds are that by the time the general investor hops on the bandwagon, it will be too late.
That said, there is some wisdom to be gleaned from the research surrounding “sell in May.” For instance, it reminds us of the unpredictability of markets, and the need to resist the urge to “time” our entrances and exits; over and over, research studies have proved investors miss the right entry or exit point and relinquish up to 50 percent of the potential gains. Much of the time, they would have done better by sitting still – and ensuring that they own the best stocks.
After all, that “sell in May” research refers to what happens to the broad market index, not to individual companies. Remember, last year, Apple’s stock (AAPL) climbed 15.6 percent in that six month period – gains that investors would have missed out on had they sold and vanished for six months. Ironically, investors trying to time movements in Apple’s share price would have done better to do exactly the reverse, and sell in early November, then buy back in again in December. Or simply not have sold at all, since selling creates tax consequences and transaction costs.
Sam Stovall, chief equity strategist at S&P Capital IQ points out that in the last 67 years, the advance recorded by the S&P 500 index in May has been less than half that of the gain in the other 11 months of the year. But the research team at his firm instead suggests reallocating assets into mutual funds with a heavy weighting in defensive stocks, such as consumer staples. Meanwhile, Scott Wren, senior equity strategist at Wells Fargo suggests taking advantage of any opportunities that arise to add to their holdings of economically cyclical stocks that might benefit from higher than expected levels of global growth.
But this is one point where you may want to study the data generated by Kozey of Thomson Reuters. Since 2000, investors who have taken advantage of selloffs during this May to October period and sought to “buy on the dips” have lived to regret it, as the strategy has produced losses, rather than profits.
Perhaps it’s wisest of all to put investment mantras and seasonal factors firmly to one side and instead just focus on finding good stocks that are likely to do better than their peers even in tough economic environments – and hang on to them. Then take the summer off from obsessing about each daily hiccup in stock market valuations.